Exit and Growth Strategies for Middle Market Businesses

It is that time of year, tax season is upon us and certainly on our minds. So how will the new 2017 Tax Reform Act affect M and A transactions?

I realize that taxes are not a subject that stimulates most people, but I’m certainly excited about what these changes mean for mergers and acquisitions. As you might guess, the most important change was the permanent reduction of the corporate tax rate from a graduated top rate of 35% to a flat, fixed rate of 21%. Additionally, the Alternative Minimum Tax was repealed.

These changes let companies control more of their earnings allowing them to potentially provide higher dividends to their shareholders, reinvest in capital assets and, of course, have available more money to purchase other companies.

Another important feature of the 27 Tax Reform Act is in many instances it diminishes the impact of double taxation on earnings and gains to shareholders. The act also extends the bonus depreciation rule to allow tax payers to deduct as much as 100% of the cost of most tangible assets such as machinery and equipment. This would allow the company to purchase new or used assets and fast track the write off. This does not apply to real estate and a couple of other asset categories.

For purchasers of companies, this means increased accelerated deductions. For sellers, exposure to increased depreciation recapture. The thought process is this type of deduction should cause an increase of asset transactions versus stock transaction for the buying market.

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